Case of Resolving Unpaid Wages Including Severance Pay
Labor Attorney Daejun Shin / Kangnam Labor Law Firm
I. Facts of the Case
Employee B joined Corporation K1, established by Employer A (8 full-time employees at the time), around August 2016 and worked there until leaving the company around November 2022.
Thereafter, B entered Corporation K2, newly established by A (3 full-time employees at the time), around May 2020 and worked there; however, after receiving a standby order from A, B stopped working while waiting at home around August 2024 (the period during which B worked for both corporations simultaneously was approximately 2 years and 6 months).
During B’s employment at the two corporations, B made a significant contribution to sales performance and was never subject to any disciplinary action.
However, the employment contract entered into with A had been lost, although both corporations duly paid the four major social insurance contributions, and annual wage & salary tax withholding receipts were issued.
Regarding wages, B received fixed and regular wages from both corporations (K1 – about KRW 2.3 million, K2 – about KRW 2 million), and there were no unpaid wages during employment and no disagreements concerning overtime pay.
However, a substantial amount that B had borrowed in advance during employment was repaid over several years through monthly deductions from wages, although a portion of the unpaid balance still remained after B’s departure.
Meanwhile, at the time of leaving Corporation K1, there was an issue regarding payment of unused annual leave allowance, and the parties had differing views on the nature of a certain amount of money paid to B under A’s name (whether it was a performance bonus or a loan).
After finally leaving Corporation K2, B had not been paid severance pay for a considerable period of time, and around August 2025, B entrusted this unpaid wage case to our labor law firm.
Ⅱ. Issues Related to the Payment of Severance Pay
1. Period for Calculating Severance Pay
ㅇ According to Articles 4 and 8 of the Employee Retirement Benefit Security Act, severance pay is generated only when an employee has worked continuously for at least one year at the same workplace.
The continuous service period refers to the time from the date of entry to the date of retirement.
ㅇ If an employee worked at multiple corporations during the period, severance pay must be calculated separately for each corporation because each is an independent and distinct legal entity.
Even if there was a period during which the employee worked for two corporations simultaneously, as long as each corporation separately paid wages and the four major social insurances, severance pay must be calculated independently based on the full length of service for each corporation.
Therefore, it is not permissible to combine the overlapping period of simultaneous work and calculate severance pay only once based on the total years of service, nor to calculate severance pay collectively based on the wage level of whichever corporation is more favorable to the employee.
2. Standard Wage for Calculating Severance Pay
ㅇ Principle: Severance pay is calculated based on the employee’s average wage (Labor Standards Act Article 2(1)6; Employee Retirement Benefit Security Act Article 8(1)).
The average wage is computed by taking the total amount of wages paid during the three months immediately preceding the date the event occurred (retirement, accident, etc.), excluding reimbursement-type payments, welfare benefits, non-fixed bonuses, temporary special incentives, and payments made due to retirement itself, and dividing that amount by the total number of days in that period (including not only prescribed working days but also holidays and leave days).
ㅇ Exception: When the average wage calculated above is lower than the ordinary wage, the ordinary wage is deemed to be the average wage (Labor Standards Act Article 2(2) 2 and Enforcement Decree Article 6(1)).
This rule exists to prevent disadvantages to the employee in connection with severance pay and similar payments.
3. Split Payment of Severance Pay
Any agreement to pay severance pay in installments is invalid under the Labor Standards Act.
Accordingly, any amount paid in advance during the employment relationship under the name of “severance pay” has no legal effect, either as severance pay or as wages.
Therefore, if the employer paid such an amount, the payment constitutes a payment without legal cause, and the employee must return it as unjust enrichment.
In such cases, the employer may set off that return claim (as an automatic claim) against the employee’s actual severance pay claim, and such set-off is permitted as part of the settlement of severance pay.
4. Negative Prescription for Severance Pay and Grounds for Interruption
ㅇ Severance pay and other monetary claims must, in principle, be settled within two weeks after retirement.
However, if the employer and the employee have a special agreement extending this settlement period, such extension is permissible (Labor Standards Act Article 36).
ㅇ Negative (or extinctive) prescription begins on the day following the expiration of the monetary settlement — two weeks after retirement, or the extended period if such a special agreement exists — and the employee may claim severance pay within three years from that date (Article 49 of the Act).
ㅇ If the employee sends a demand notice (contents-certified mail) to the employer for unpaid wage claims, the effect of interrupting negative prescription will retroactively lapse unless, within six months of the demand, the employee initiates judicial proceedings, participates in bankruptcy proceedings, responds to a summons for settlement, or obtains seizure or provisional seizure (Civil Act Article 174).
Negative prescription is also interrupted if the employer acknowledges the wage debt—e.g., by providing a written acknowledgment of unpaid wages, partially paying the unpaid amount, or signing a document acknowledging payment during the Ministry of Labor’s investigation of a wage complaint.
Additionally, in an administrative lawsuit concerning unfair dismissal, where the National Labor Relations Commission was the defendant and the employee participated as an auxiliary party, the interruption of negative prescription for wage claims was recognized.
However, filing a criminal complaint (or accusation) with the authorities regarding unpaid wages, or filing a wage complaint with the Ministry of Labor, does not constitute a judicial claim and therefore does not interrupt negative prescription.
Likewise, the issuance of a Wage Arrears Confirmation by the Labor Office is not regarded as a judicial claim and does not interrupt negative prescription.
5. Statute of Limitations for Criminal Prosecution
ㅇ The criminal penalties for wage arrears or non-payment of severance pay are imprisonment of up to three years or a fine of up to KRW 30 million, and these crimes fall under offenses not requiring prosecution against the victim’s will (i.e., offenses where prosecution cannot be initiated against the explicit will of the victim) (Labor Standards Act Article 109).
ㅇ Under Criminal Procedure Act Article 249(1), the statute of limitations for crimes punishable by imprisonment of up to three years (including violations of Labor Standards Act Article 109(1)) is five years.
Thus, a criminal complaint concerning unpaid wages or unpaid severance pay may be filed within five years from the date the offense occurred.
The starting point of the statute of limitations is the time when the criminal act is completed (Criminal Procedure Act Article 252).
For unpaid wages or severance pay, this is deemed to be the point when the statutory payment deadline (i.e., 14 days after the wage payment date or retirement date, or the extended period if a special agreement exists) has passed.
III. Delay Interest
ㅇ Labor Standards Act Article 37 provides that when an employer fails to pay wages by the deadline prescribed by law, the employer becomes obligated to pay delay interest for the number of days in arrears from the following day until the actual date of payment.
The delay interest rate currently prescribed by the Enforcement Decree is 20% per annum (Enforcement Decree Article 17), which is a percentage set by Presidential Decree within the legally permissible limit (within 40% per annum).
The point at which delay interest begins to accrue varies depending on the type of wage that should have been paid:
First, for severance pay or unpaid wages that fall under the scope of monetary settlement under Article 36, if payment is not made by the 14th day from the date on which the reason for payment occurred (e.g., retirement), delay interest begins accruing from the next day.
However, if there are special circumstances, the parties may extend the deadline by agreement.
Second, for regular wages under Article 43, delay interest begins to accrue from the day following the employer’s designated regular payday.
Even if the employee retires after the delay interest obligation under Article 37 has already arisen due to non-payment of regular wages, the starting point of delay interest is the regular payday, not the retirement date.
This rule exists to prevent employers from postponing the start of delay interest by citing the employee’s retirement.
However, if wage payment is delayed due to natural disasters or other force majeure reasons specified by Presidential Decree, delay interest does not apply during the period such reasons continue.
IV. Resolution of the Case
a. There were no unpaid wages during B’s employment, and since no special agreement existed between the employer and B regarding the extension of the monetary settlement period upon retirement, B could claim severance pay from Corporation K1 until around November–December 2025—i.e., three years from the day following the expiration of the monetary settlement period (two weeks after retirement in November 2022).
For Corporation K2, B could claim severance pay until around August–September 2027—i.e., three years from the day following the expiration of the monetary settlement period (two weeks after the August 2024 retirement date).
b. B included the approximately 2 years and 6 months of simultaneous service in the respective service periods for each corporation, and because the average wage during the final three months before retirement was lower than the ordinary wage for both corporations, severance pay was calculated based on the ordinary wage pursuant to Article 2(2) of the Labor Standards Act (① for K1: monthly wage of approx. KRW 2.3 million, ② for K2: monthly wage of approx. KRW 2 million).
Accordingly, B claimed from Employer A, the representative of both corporations, severance pay calculated based on approximately 6 years and 3 months of service for K1, and approximately 4 years and 3 months of service for K2 (a combined total of 10 years and 7 months).
c. B, through a representative, sent a contents-certified demand letter.
In particular, for K1, the three-year negative prescription period for unpaid severance pay was nearly expiring; therefore, the issuance of the demand letter—which would produce a retroactive six-month interruption of prescription in preparation for future civil litigation—was urgent.
After B filed a wage arrears complaint with the competent Labor Office and following the labor inspector’s investigation, Employer A, acknowledging the clear existence of unpaid severance pay, paid all severance arrears for both corporations.
d. When B retired from K1 in November 2022, the employment relationship had naturally ended due to managerial needs (as B was simultaneously working for both corporations), and thus it could not be considered a dismissal; accordingly, the issue of dismissal notice did not arise.
However, with respect to K2, B had received a standby order from A without just cause or specific duration, and B’s employment ended while waiting at home in August 2024.
This constituted a dismissal (as B’s entire employment relationship with A ended by this dismissal).
Therefore, A was legally obligated to give dismissal notice or pay dismissal notice allowance but failed to do so.
Thus, dismissal notice allowance was claimed for B.
e. There was no actual dispute regarding overtime allowance, as B had not been unpaid such amounts.
f. At the time of B’s retirement from K1 (November 2022), some unused annual paid leave remained.
The negative prescription period for the annual paid leave allowance began on the day after retirement (December 1, 2022) and was claimable until December 1, 2025.
However, B decided not to claim the annual leave allowance.
With respect to K2, B left the company around August 2024, but since the number of regular employees at the time was three, annual paid leave did not accrue.
g. Since delay interest applies at 20% per annum to unpaid wages from the date following the payment deadline, and since no special circumstances existed that would justify an agreement between the parties to extend the payment date for severance pay or other wages, delay interest was calculated from the day following the 14th day after the occurrence of the grounds for payment (retirement dates for each corporation).
h. There existed individual claims and debts between B and K1 regarding salary advances.
B had been repaying the advances through small monthly deductions over several years, but an outstanding amount remained at retirement.
A asserted that the remaining advance should be deducted from the severance pay.
However, as stated earlier, deduction of advances from severance pay is, in principle, prohibited and must be resolved through civil proceedings.
Therefore, the parties agreed to offset the remaining advance amount against the delay interest.
i. There was also disagreement between the parties regarding the nature of a certain amount paid to B under A’s name—whether it constituted a performance bonus or a loan.
Thus, identifying the true nature of the payment was necessary, and the matter had to be resolved through civil procedures.
However, A abandoned any claim for return due to the unclear grounds of payment.
j. Had B satisfied the requirement of filing a petition within one year from the day following the last date of arrears, B could have used the simplified substitute payment (간이대지급금) through COMWEL.
However, because more than one year had passed after the day following retirement from each corporation without filing any petition, B could not use the system.
For K2, because two years had not yet passed since retirement, the period for filing a civil lawsuit remained.
Nevertheless, Employer A paid all unpaid severance pay and other wage arrears for both corporations, and resolved all remaining amounts—without pursuing civil litigation regarding the employer–employee advance-payment debt relationship—in accordance with the relevant labor laws.
I. Facts of the Case
Employee B joined Corporation K1, established by Employer A (8 full-time employees at the time), around August 2016 and worked there until leaving the company around November 2022.
Thereafter, B entered Corporation K2, newly established by A (3 full-time employees at the time), around May 2020 and worked there; however, after receiving a standby order from A, B stopped working while waiting at home around August 2024 (the period during which B worked for both corporations simultaneously was approximately 2 years and 6 months).
During B’s employment at the two corporations, B made a significant contribution to sales performance and was never subject to any disciplinary action.
However, the employment contract entered into with A had been lost, although both corporations duly paid the four major social insurance contributions, and annual wage & salary tax withholding receipts were issued.
Regarding wages, B received fixed and regular wages from both corporations (K1 – about KRW 2.3 million, K2 – about KRW 2 million), and there were no unpaid wages during employment and no disagreements concerning overtime pay.
However, a substantial amount that B had borrowed in advance during employment was repaid over several years through monthly deductions from wages, although a portion of the unpaid balance still remained after B’s departure.
Meanwhile, at the time of leaving Corporation K1, there was an issue regarding payment of unused annual leave allowance, and the parties had differing views on the nature of a certain amount of money paid to B under A’s name (whether it was a performance bonus or a loan).
After finally leaving Corporation K2, B had not been paid severance pay for a considerable period of time, and around August 2025, B entrusted this unpaid wage case to our labor law firm.
Ⅱ. Issues Related to the Payment of Severance Pay
1. Period for Calculating Severance Pay
ㅇ According to Articles 4 and 8 of the Employee Retirement Benefit Security Act, severance pay is generated only when an employee has worked continuously for at least one year at the same workplace.
The continuous service period refers to the time from the date of entry to the date of retirement.
ㅇ If an employee worked at multiple corporations during the period, severance pay must be calculated separately for each corporation because each is an independent and distinct legal entity.
Even if there was a period during which the employee worked for two corporations simultaneously, as long as each corporation separately paid wages and the four major social insurances, severance pay must be calculated independently based on the full length of service for each corporation.
Therefore, it is not permissible to combine the overlapping period of simultaneous work and calculate severance pay only once based on the total years of service, nor to calculate severance pay collectively based on the wage level of whichever corporation is more favorable to the employee.
2. Standard Wage for Calculating Severance Pay
ㅇ Principle: Severance pay is calculated based on the employee’s average wage (Labor Standards Act Article 2(1)6; Employee Retirement Benefit Security Act Article 8(1)).
The average wage is computed by taking the total amount of wages paid during the three months immediately preceding the date the event occurred (retirement, accident, etc.), excluding reimbursement-type payments, welfare benefits, non-fixed bonuses, temporary special incentives, and payments made due to retirement itself, and dividing that amount by the total number of days in that period (including not only prescribed working days but also holidays and leave days).
ㅇ Exception: When the average wage calculated above is lower than the ordinary wage, the ordinary wage is deemed to be the average wage (Labor Standards Act Article 2(2) 2 and Enforcement Decree Article 6(1)).
This rule exists to prevent disadvantages to the employee in connection with severance pay and similar payments.
3. Split Payment of Severance Pay
Any agreement to pay severance pay in installments is invalid under the Labor Standards Act.
Accordingly, any amount paid in advance during the employment relationship under the name of “severance pay” has no legal effect, either as severance pay or as wages.
Therefore, if the employer paid such an amount, the payment constitutes a payment without legal cause, and the employee must return it as unjust enrichment.
In such cases, the employer may set off that return claim (as an automatic claim) against the employee’s actual severance pay claim, and such set-off is permitted as part of the settlement of severance pay.
4. Negative Prescription for Severance Pay and Grounds for Interruption
ㅇ Severance pay and other monetary claims must, in principle, be settled within two weeks after retirement.
However, if the employer and the employee have a special agreement extending this settlement period, such extension is permissible (Labor Standards Act Article 36).
ㅇ Negative (or extinctive) prescription begins on the day following the expiration of the monetary settlement — two weeks after retirement, or the extended period if such a special agreement exists — and the employee may claim severance pay within three years from that date (Article 49 of the Act).
ㅇ If the employee sends a demand notice (contents-certified mail) to the employer for unpaid wage claims, the effect of interrupting negative prescription will retroactively lapse unless, within six months of the demand, the employee initiates judicial proceedings, participates in bankruptcy proceedings, responds to a summons for settlement, or obtains seizure or provisional seizure (Civil Act Article 174).
Negative prescription is also interrupted if the employer acknowledges the wage debt—e.g., by providing a written acknowledgment of unpaid wages, partially paying the unpaid amount, or signing a document acknowledging payment during the Ministry of Labor’s investigation of a wage complaint.
Additionally, in an administrative lawsuit concerning unfair dismissal, where the National Labor Relations Commission was the defendant and the employee participated as an auxiliary party, the interruption of negative prescription for wage claims was recognized.
However, filing a criminal complaint (or accusation) with the authorities regarding unpaid wages, or filing a wage complaint with the Ministry of Labor, does not constitute a judicial claim and therefore does not interrupt negative prescription.
Likewise, the issuance of a Wage Arrears Confirmation by the Labor Office is not regarded as a judicial claim and does not interrupt negative prescription.
5. Statute of Limitations for Criminal Prosecution
ㅇ The criminal penalties for wage arrears or non-payment of severance pay are imprisonment of up to three years or a fine of up to KRW 30 million, and these crimes fall under offenses not requiring prosecution against the victim’s will (i.e., offenses where prosecution cannot be initiated against the explicit will of the victim) (Labor Standards Act Article 109).
ㅇ Under Criminal Procedure Act Article 249(1), the statute of limitations for crimes punishable by imprisonment of up to three years (including violations of Labor Standards Act Article 109(1)) is five years.
Thus, a criminal complaint concerning unpaid wages or unpaid severance pay may be filed within five years from the date the offense occurred.
The starting point of the statute of limitations is the time when the criminal act is completed (Criminal Procedure Act Article 252).
For unpaid wages or severance pay, this is deemed to be the point when the statutory payment deadline (i.e., 14 days after the wage payment date or retirement date, or the extended period if a special agreement exists) has passed.
III. Delay Interest
ㅇ Labor Standards Act Article 37 provides that when an employer fails to pay wages by the deadline prescribed by law, the employer becomes obligated to pay delay interest for the number of days in arrears from the following day until the actual date of payment.
The delay interest rate currently prescribed by the Enforcement Decree is 20% per annum (Enforcement Decree Article 17), which is a percentage set by Presidential Decree within the legally permissible limit (within 40% per annum).
The point at which delay interest begins to accrue varies depending on the type of wage that should have been paid:
First, for severance pay or unpaid wages that fall under the scope of monetary settlement under Article 36, if payment is not made by the 14th day from the date on which the reason for payment occurred (e.g., retirement), delay interest begins accruing from the next day.
However, if there are special circumstances, the parties may extend the deadline by agreement.
Second, for regular wages under Article 43, delay interest begins to accrue from the day following the employer’s designated regular payday.
Even if the employee retires after the delay interest obligation under Article 37 has already arisen due to non-payment of regular wages, the starting point of delay interest is the regular payday, not the retirement date.
This rule exists to prevent employers from postponing the start of delay interest by citing the employee’s retirement.
However, if wage payment is delayed due to natural disasters or other force majeure reasons specified by Presidential Decree, delay interest does not apply during the period such reasons continue.
IV. Resolution of the Case
a. There were no unpaid wages during B’s employment, and since no special agreement existed between the employer and B regarding the extension of the monetary settlement period upon retirement, B could claim severance pay from Corporation K1 until around November–December 2025—i.e., three years from the day following the expiration of the monetary settlement period (two weeks after retirement in November 2022).
For Corporation K2, B could claim severance pay until around August–September 2027—i.e., three years from the day following the expiration of the monetary settlement period (two weeks after the August 2024 retirement date).
b. B included the approximately 2 years and 6 months of simultaneous service in the respective service periods for each corporation, and because the average wage during the final three months before retirement was lower than the ordinary wage for both corporations, severance pay was calculated based on the ordinary wage pursuant to Article 2(2) of the Labor Standards Act (① for K1: monthly wage of approx. KRW 2.3 million, ② for K2: monthly wage of approx. KRW 2 million).
Accordingly, B claimed from Employer A, the representative of both corporations, severance pay calculated based on approximately 6 years and 3 months of service for K1, and approximately 4 years and 3 months of service for K2 (a combined total of 10 years and 7 months).
c. B, through a representative, sent a contents-certified demand letter.
In particular, for K1, the three-year negative prescription period for unpaid severance pay was nearly expiring; therefore, the issuance of the demand letter—which would produce a retroactive six-month interruption of prescription in preparation for future civil litigation—was urgent.
After B filed a wage arrears complaint with the competent Labor Office and following the labor inspector’s investigation, Employer A, acknowledging the clear existence of unpaid severance pay, paid all severance arrears for both corporations.
d. When B retired from K1 in November 2022, the employment relationship had naturally ended due to managerial needs (as B was simultaneously working for both corporations), and thus it could not be considered a dismissal; accordingly, the issue of dismissal notice did not arise.
However, with respect to K2, B had received a standby order from A without just cause or specific duration, and B’s employment ended while waiting at home in August 2024.
This constituted a dismissal (as B’s entire employment relationship with A ended by this dismissal).
Therefore, A was legally obligated to give dismissal notice or pay dismissal notice allowance but failed to do so.
Thus, dismissal notice allowance was claimed for B.
e. There was no actual dispute regarding overtime allowance, as B had not been unpaid such amounts.
f. At the time of B’s retirement from K1 (November 2022), some unused annual paid leave remained.
The negative prescription period for the annual paid leave allowance began on the day after retirement (December 1, 2022) and was claimable until December 1, 2025.
However, B decided not to claim the annual leave allowance.
With respect to K2, B left the company around August 2024, but since the number of regular employees at the time was three, annual paid leave did not accrue.
g. Since delay interest applies at 20% per annum to unpaid wages from the date following the payment deadline, and since no special circumstances existed that would justify an agreement between the parties to extend the payment date for severance pay or other wages, delay interest was calculated from the day following the 14th day after the occurrence of the grounds for payment (retirement dates for each corporation).
h. There existed individual claims and debts between B and K1 regarding salary advances.
B had been repaying the advances through small monthly deductions over several years, but an outstanding amount remained at retirement.
A asserted that the remaining advance should be deducted from the severance pay.
However, as stated earlier, deduction of advances from severance pay is, in principle, prohibited and must be resolved through civil proceedings.
Therefore, the parties agreed to offset the remaining advance amount against the delay interest.
i. There was also disagreement between the parties regarding the nature of a certain amount paid to B under A’s name—whether it constituted a performance bonus or a loan.
Thus, identifying the true nature of the payment was necessary, and the matter had to be resolved through civil procedures.
However, A abandoned any claim for return due to the unclear grounds of payment.
j. Had B satisfied the requirement of filing a petition within one year from the day following the last date of arrears, B could have used the simplified substitute payment (간이대지급금) through COMWEL.
However, because more than one year had passed after the day following retirement from each corporation without filing any petition, B could not use the system.
For K2, because two years had not yet passed since retirement, the period for filing a civil lawsuit remained.
Nevertheless, Employer A paid all unpaid severance pay and other wage arrears for both corporations, and resolved all remaining amounts—without pursuing civil litigation regarding the employer–employee advance-payment debt relationship—in accordance with the relevant labor laws.
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